Friday, February 12, 2010

Chart Visual Signals

Once you've looked at and studied many charts, pattern recognition begins to occur. This may be for better or worse. I find the language of charts intriguing. After all, they often are simply a catalog of human behavior.

People who say Gold is simply a manifestation of monetary inflation miss the boat. There is monetary inflation 95-99% of the time in a paper money system. And if it's a Gold standard, it will be restrained by common sense and/or critical thought for about a year. Then some minor crisis will hit. Then another. Then another. Next thing you know, your Gold is confiscated for the good of the state and then revalued higher to benefit the thief. Every monetary system will fail and succumb to inflation if history is a valid guide.

When a paper system begins and even in its middle to beginning-of-the-end phases, debt expansion seems to stoke the bullish fires of financial speculation. But when the final phases begin, Gold becomes a go-to asset. This is because paper promises are revealed for the uncollectable dust they have become. The scramble for economic survival forces one to hedge that paper with something reliable.

As excessive paper-backed debt takes a quantum-leap decline in value, Gold acts as a mirror and reflects the inverse value of paper debt tickets. Other asset classes can gain in nominal terms if an inflationary spiral occurs (rather than a deflationary implosion), but Gold shines in this final "Winter" K-Wave phase as a hedge against government insanity. It's a confidence thing. If you don't think the economy is going to grow, why not put your money in a cash position that can't be debased upon a whim?

If one could pinpoint an absolute best time to hold Gold, it would be when the monetary system one is living under approaches its final denouement. Of course, this is ironically the time when your government will do everything in its power to make sure it can extract additional revenue from you. How else can the government support the lifestyle to which it has grown accustomed?

Those who follow economic policy know that we have learned how to forget the future. We must stop all economic pain immediately and at ANY cost. Everyone working near or benefitting from the magical debt crank must be comfortable and is willing to deny reality. I mean, what? Do you want to go hide in a bunker and eat your Gold with crazies? Why not just buy a gun, drink the punch and speak in tongues to Jim Jones? If the world is ending, who cares about Gold?

Well, call me an optimist (at least relative to the hardest-core segment of the Gold bull crowd), but I don't think the world is ending. I just think it's another cyclical transfer of wealth from the "financial" sector to the "tangible" sector. I think the people drinking the Kool-Aid are the ones asking the same types of questions at the end of the previous paragraph and I think they will be asking to buy your Gold from you when the price hits $2500-$3000/ounce. Trust is an oscillating pendulum swinging away from Wall Street for the time being. It is normal and natural for a decade or two of financial asset revulsion after such a vulgar display of power [yes, stolen from Pantera] by our financiers.

It is a secular credit contraction being fought by paper masters with a debt press firing on all cylinders. Deflationary reality meets paper tsunami of fiction. Indeed, fact can be more fleeting than fiction when all sanity has evaporated. Gold will continue to thrive during the pandemonium.

The entire mortgage market (what's left standing) has been transferred to the government balance sheet. Really? In which country, again?! There are active discussions of more countries being smacked (a la Iceland) by the wrecking ball of debt and leverage. Deflation is what should happen. That doesn't mean it will in a paper system that has abandoned all concern for consequences occurring more than a week from now.

The fundamental back drop for Gold is strong and the mania phase is ahead of us, not behind us. The "early adopter" phase has come to a close in this cycle, to be sure. But the final multi-month irrational exuberance that marks the ending phase(s) of a secular bull has not yet shown its purty face.

Longer-term bulls buy on weakness and hold. Certain chart signals can be helpful to those trying to time their buys using tea leaf reading (i.e. technical analysis). Here's one view of a potential Gold signal mechanism in its artistic/qualitative form:

The signal works like this: "When things pinch in, buy in." Ain't it simple and purty? Following is the signal in a more quantitative form. The signal is the COT report for Gold. No signal works all the time as anyone who follows markets knows, but look at the prior success of this pattern:

When the number of open contracts declines significantly (i.e. the chart-plotted lines of the number of open contracts for large specs and commercial traders move towards the zero line as well as each other), a significant bottom is typically established. The "weak," trend-following hands are flushed to establish a higher low as the bull powers ahead. As someone trying to follow those trends myself, I have a certain detached sense of calm about the intermediate and longer term that tempers any short-term frustration with the price of physical Gold. How about you? Do you think we're there yet or do we have more "wear you out" type bull action to go?

I speculate a little in Gold stocks and accumulate physical Gold. My physical Gold accumulation strategy has certainly been successful, my trading less consistently so. Gold stocks have not been particularly inspiring during the current short-term bounce. I expect further strength relative to the Gold price over the next week or two. Without it, I will become a "weak" hand in Gold stocks myself. I am as strong a hand as any when it comes to physical Gold - none of my Gold is being considered for sale until the Dow to Gold ratio hits 2. provides you with the information to make the right decisions on your AU 5 Day investments

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